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Why Kroger Co's Growth Strategy Beats Its Rivals

There's a key difference between the supermarket giant and its competitors.

There is some serious growth afoot in the supermarket industry. It seems like nearly every big grocery chain, private or public, has major plans for expansion under way. Trader Joe's and Wegman's are both opening their doors in new parts of the country, while big box chains like Wal-Mart are adding stores where they can, and organic and natural purveyors like Whole Foods Market have plans to more than triple their store counts.

There's a problem here, however. Supermarkets are a staid, slow-growth industry. From 2008 to 2013, grocery store sales grew by just about 2% annually, according to the Census Bureau. It's a huge industry, with annual sales approaching $600 billion, but with so little growth, it means these players will have to take market share from one another in order for their new stores to be successful.

One company, however, has a different strategy.

Kroger Inc (NYSE:KR) is the biggest pure play supermarket company in the country, with revenue of $108 billion last year. In addition to its namesake brand, the company also counts King Sooper's, Ralph's, and Fred Meyer's among its big-name banners. While rival companies have expanded primarily through opening new stores, Kroger has grown through acquisitions, eliminating the potential for saturating markets.

Kroger wasn't built in a dayThe company, founded in 1883, has grown over the years to be the nation's #3 retailer due to acquisitions big and small. Two deals in particular stand out. In 1983, the company merged with Dillon Companies to become a coast-to-coast operator and take ownership of its subsidiaries, King Sooper's, City Market, and others. Then in 1999 came the biggest merger in Kroger's history: it combined with Fred Meyer, the fifth-largest grocery company at the time, in a $13 billion deal that gave it control of Ralph's, QFC, and other banners. Management credited the deal with enabling the company to generate "huge economies of scale in purchasing, logistics, information systems, and manufacturing," which helped pave the way for its subsequent success.

More recently, in 2014 the company acquired the upscale Southeast grocery chain Harris Teeter for $2.5 billion. Over the past ten years, sales have nearly doubled as a result of that strategy, and the company's stock price has tripled in the last three years.

Analysts have suspected that further acquisitions are on the way, and CFO Mike Schlotman has said he believes the company's balance sheet is strong enough to support another deal.

The less fortunateWhile Kroger shares are soaring amid strong same-store sales, its rivals are moving in a different direction. Wal-Mart shares hit a new 52-week low earlier this week after profits fell significantly last quarter, and Whole Foods stock has sunk to a four-year low on slowing growth due to competition in organics from Kroger and others.

Both companies have major expansion plans of their own. Wal-Mart plans to open 60 to 70 Supercenters and 160 to 170 Neighborhood Markets, while Whole Foods management still sees room for 1,200 stores nationwide from a count of about 400 today.

With other companies expanding as well and the grocery industry only growing by about $12 billion a year, there is only so much room for new stores. That makes Kroger's expansion strategy the least risky of all, as through acquisitions the company eliminates one of its competitors' stores for every store it gains. Though the grocery giant will need to execute on the deals and integrate successfully, that's at least one reason to believe that Kroger is a solid bet for continued growth.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns and recommends Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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